More Evidence that Workforce Participation, and Not Unemployment, Drives Wage Gains

More evidence that workforce participation, and not unemployment, drives wage gains:

More Evidence that Workforce Participation, and Not Unemployment, Drives Wage Gains

The Economist reports:

In a recent working paper, Danny Yagan of the University of California, Berkeley, compares places where unemployment rose a lot during the recession, such as Phoenix, in Arizona, to those where the increase was less severe, such as San Antonio, in Texas. He finds that for every one percentage-point rise in local unemployment during the recession, working-age people were 0.4 percentage points less likely to be employed in 2015. Unemployment rates in these places have largely converged again, whereas overall employment rates have not, suggesting that some workers were so deterred that they left the labour force altogether. … Since late 2015, as the labour market has tightened, participation among prime-age workers has risen sharply.

 In April 2000 nearly 82% of Americans aged between 25 and 54 had jobs. Today, despite low unemployment, the proportion is 79%. The difference represents about 3.7m potential workers.

The Economist cautions that “higher wages need not mean higher prices.” 

Rising wages should encourage firms to invest more in labour-saving technology. There are signs already that productivity is rebounding. In every quarter of 2017 it was more than 1% higher than a year before, the first such sustained growth since 2010.

Apart from higher productivity, one way the economy might absorb higher pay is if firms’ profit margins shrink. Over recent decades, corporate profits have risen to record highs as a percentage of GDP. Meanwhile the share of national income flowing to workers has declined. A hot labour market might reverse those trends. Lower profits can be bad for the stock market, but they are good for workers.

Poorer households are especially likely to benefit. … Since 2016 weekly wage growth has been strongest towards the bottom of the income distribution.